Top 5 things that Increase Repair Costs

Top 5 things that Increase Repair Costs

What’s up, everyone? Chris Kennedy here with Mayfair Real Estate in Fort Lauderdale, Florida. And in this video, I’m going to show you how to make a realistic estimate for the repairs and maintenance line item on your proformas or your income statement before you purchase a multi-family property here in the Fort Lauderdale or South Florida market. So stay tuned.All right, so one of the most important things that you need to consider when you’re looking at a deal, when you’re looking at picking up a multi-family property here in Broward County or South Florida, one of the most important things you need to consider is how much is going to be spent on an annual basis on repairs and maintenance. And there’s not really one straight answer for this. It varies greatly by property. But I will give you some pointers in this video on how to make a realistic estimate.Now, right off the bat, I’m going to tell you a rule of thumb that I use is I use 4 to 6% of the gross rents collected as a reasonable repairs and maintenance expense line item. So in other words, if your building is producing $100,000 per year in top-line rent, then it’s pretty realistic to assume you’re going to spend somewhere between 4,000 and 6,000 on repairs and maintenance. Now, this obviously does not include capital expenditures, like renovations, upgrades, replacement of large items, such as AC units. This is standard repairs and maintenance.Now, when you get listing marketing packets from brokers, you will find out that a lot of brokers use the same line item or same estimate over and over again in their marketing packet. So they might say, okay, it’s a multi-family property, 20 units. We’re going to estimate $350 per unit per year for a repair expense. Another broker might use $500. But on average, they’re going to use the same number for every single deal that they list, on the most part.What you need to know is what are the things that can actually influence those numbers. So, while I said 4 to 6% is a reasonable estimate, that would be, 4% on the low end is going to be a newer, more-recently renovated property. 6% might be a property that might be a little bit older; it needs some more maintenance. But that range can vary. Obviously, you can have a much higher repair expense depending on other factors. You can have a slightly lower than 4% repair expense depending on some factors. So what are those factors? I’ve got five of them.So first and foremost, the most obvious is simply the age of the property. What is the age of the building? If you’re buying a building built in 1934 versus a building built in the 1990s, you’re pretty much guaranteed that your repair expenses are going to be higher on the older building than on the newer one. This goes even if that older property has been repositioned and upgraded and it’s gone through a significant amount of renovations, it’s still an older building, so it’s more prone to having leaks, the stucco, the walls, that sort of thing. It’s just more prone to issues, okay? So older properties generally have higher repair-expense ratios than newer properties.Okay, the second item that you’re going to think of, and when you’re looking at a property, taking a tour, walking around, the second item is deferred maintenance. When you’re touring a property, if you’re walking around and seeing there’s a lot of deferred maintenance at the property, then it’s pretty obvious that you’re going to spend more on repairs in general, especially in the first months or years of ownership depending how aggressive you are in bringing that property up to a good standard.Now, while it’s obvious that you’re going to spend money taking care of the actual deferred items, what is maybe not so obvious is that because the previous ownership or previous management did not deal with a lot of those maintenance and repairs, there’s probably a lot of stuff that’s actually unseen that you’re going to have to take care of. So you have to be careful when there’s a lot of deferred maintenance. You definitely want to be on the conservative side estimating your repair-expense ratio. So you definitely want to use something up in the 6, maybe 7% range for the first year or so, and then it might taper off and come down.Okay. Now, the third item that can influence the repair expense at your property is kind of hand in hand with deferred maintenance, but not necessarily. It would just be poor-quality repairs or low-quality repairs done at a property. So you might have a property where the owner has tried to keep up with maintenance but has either hired inexperienced handymen or repairmen or has been really cheap and not wanted to pay good people, and therefore the repairs that were made were actually done to a really low standard.This creates not only liability and issues, but it also just creates additional repairs because stuff that’s not repaired right usually has to be repaired again. And if it’s not repaired right, it can cause damage to other parts of a property. In other words, a roof leak that is not repaired correctly will not be totally leak-proof and therefore you’ll continue to have water dripping in. Maybe an AC unit isn’t connected or installed properly, and therefore you’ve got water draining the wrong way from that. This happens all the time. So be on the lookout for poor-quality workmanship on repairs that have been done. That can lead to a higher repair-expense ratio.The fourth item on a list of things that can influence how much you spend on repairs is the amount of turnover that you expect to have at a property. So a great example that people oftentimes overlook or don’t think through is you might go and tour a property which is actually in really nice shape. It’s been very well maintained, but the units are a little bit older. And although they are older units, maybe not updated, they are in really good condition. The owner has taken care of it. They may have owned it for a long time and the property shows pride of ownership, right? So these are usually great deals because, in general, the deferred maintenance has not happened, right? It’s been well maintained. And generally, the repairs that have been made have been done by quality people or oftentimes the owner themselves who takes pride in the work. And therefore, that will not influence the repair expense.However, what is often the case is that the rents in these units are low and the rents could be significantly lower than market. I’m talking hundreds of dollars. So if you go into one of these deals and you’re planning to raise rents to market or to just below market within the first six months to a year, then what happens is you’re going to inevitably have some turnover. Those tenants, the tenant base in that property at the time you purchase, not everyone in that tenant base is either going to want to or have the ability to afford those higher market rents and you will have move-outs.Obviously, no matter how well a property is maintained, no matter how well a tenant maintains a unit, when a tenant moves out there are costs associated with that. And I’m talking about specifically repair costs. You simply almost always have to do some form of painting, whether it’s just a touch-up paint job or a full paint job in an apartment. That’s typical wear and tear that you cannot claim against a security deposit, so it ends up being a repair expense. You might have to do some miscellaneous small fixes, change some outlets, replace blinds, et cetera.So unit turnover creates repair expenses. So the expense with unit turnovers is not only the leasing, it’s the repairs associated with them, obviously. So that’s a big item. Don’t overlook that when you’re looking at a property that is in really good shape but has low rents. Plan for higher repair costs in your first six months to a year of ownership if you plan to turn around the units and up the rents to market.All right, item number five on my list is actually unit size or unit makeup. So what I’m talking about here is number of bedrooms and bathrooms in the apartments and how many of each apartment type do you have in a building. Specifically, I’m thinking about kind of the extremes here. If you have an apartment building with a lot of studio apartments, you’re going to inevitably have more turnover, which then results in higher repair expense because of the higher turnover. It’s just natural that people will not stay in a studio apartment as long as they will stay in a two-bedroom apartment in general, right? There are people who stay in studios for years, but in general studio apartments turnover a lot faster and more frequently than one-bedroom and two-bedroom apartments. So if you’re looking at a property that has a lot of studios in it, you definitely need to budget for a little bit of a higher expense ratio because you’re going to turn over more units and have the repairs associated with unit turns.Okay. On the other end of the spectrum is an apartment building that might have a lot of larger units. What happens here is you have more occupants in larger units. More occupants tend to create more damage to a property, more wear and tear, and therefore you may have more repairs, more use of the bathroom. If there are multiple occupants, it’s more likely that you’ll have at least one of those occupants, maybe more, staying at home during the day when other occupants are out at work. So when people are staying home during the day, they’re using the air conditioning all day long versus maybe in a smaller one-bedroom unit, maybe you’ve got a couple living in a one-bedroom unit they go to work, switch off the air conditioning or at least put it at a higher temperature, so they’re not using the AC as much as a family in a larger unit. Nothing wrong with that, but just be prepared to have higher repair expenses when you’ve got more people living in the apartments.So that’s it. Those are my five key things to look for, to use to estimate your repair expenses. I hope this was helpful for you. If you want more information or you want us to take a look at a deal you are looking at specifically here in our market, then absolutely reach out, fill out the form on our page. Otherwise, if this was useful for you, I’d love it if you would go ahead and like or subscribe, and I’ll catch you on the next one. Thanks for watching.

Christopher Kennedy

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